Nobody wants to be in the fixed-line telephony business anymore, and China Telecom (NYSE:CHA) is no different. There's nothing wrong with the business per se, and it generates decent cash flow, but the future of growth rests on the company's expansion into mobile phone service and more broadband Internet offerings.
China Telecom and China Netcom (NYSE:CN) are the nation's two fixed-line telephone companies. Operating in the southern part of the country, home to fast-growing cities like Shanghai, China Telecom relies on businesses like traditional land-line telephony and long distance, as well as broadband and PAS services.
Adjusted revenue in the second half of the year grew almost 7%, but operating profits were down 7% and EBITDA was up just 1%. The company saw robust double-digit growth in both its Internet and value-added services (including ringtones), but those are still small contributors relative to telephony.
China's fixed-line operators continue to lose business to mobile operators like China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU). China Telecom wants to get into the mobile business with a 3G license, and would like to expand into IPTV (television transmitted via a broadband Internet connection) as well, but the government's delays in making the necessary regulatory decisions have stalled these efforts.
This will change eventually; either China Telecom will get the approvals it needs, or it will try to acquire its way into the markets. I expect the regulatory decisions, particularly on the 3G license, to come soon, to ensure that the systems are up and running in time for the 2008 Summer Olympics in Beijing.
Of course, the Chinese government's decisions will influence other companies like UTStarcom (NASDAQ:UTSI), Siemens (NYSE:SI), and Nokia (NYSE:NOK) as well. China Telecom will be spending less on its existing PAS systems, which provide limited wireless phone services atop existing landline infrastructure; that's bad news for PAS specialist UTStarcom. Meanwhile, most of the world's telecom equipment companies are licking their chops at the chance to help build out a dedicated 3G wireless network in China.
China Telecom's stock isn't exactly widely loved, which suits me just fine. True, the company's more traditional businesses should weaken in 2006, and there's always the risk that investors have become too enamored of China in general. Despite this, I don't think today's price is too bad, relative to future potential.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
